As concerns over retirement income adequacy mount, the role of plan members in making decisions about their pension investments is a growing concern. Some plan members want some level of control over their pension investments, while others would like to hand decision-making to someone else. But what do they mean and why do they feel the way they do?
Building a clear understanding of plan members’ perceptions and expectations around their level of knowledge and how much help and guidance they need was a leading objective of our 2016 CAP Member Survey. The theme of this year’s survey is: What’s your pension persona? What’s the profile of those who want to make decisions themselves versus those who are reliant on their plan or their provider? Are those who want to make decisions themselves truly engaging with their plan? And what are the options for helping plan members?
Read: ACPM launches retirement literacy website
The survey found significant worry among many plan members about their retirement outcomes. But at the same time, many expressed a high level of optimism about how much they’ll be able to save and the returns they can expect on their investments. The findings were a significant concern for many advisory board panellists who noted that, despite the worry, many members’ expectations for the performance of their plans are unrealistic.
So what can the industry do? That was one of the key questions for our advisory board panellists as they offered their diagnosis of the problem and some solutions for addressing them. Read on to hear what they had to say.
Glenn Kauth, editor, Benefits Canada
Methodology
The 11th annual Benefits Canada CAP Member Survey was conducted online by Rogers Insights Custom Research Group in the summer of 2016, polling 1,008 Canadians who participate in a defined contribution pension plan or group registered retirement savings plan provided through their employer. In addition, the group surveyed 200 Canadians whose employers offer a defined contribution pension plan or group RRSP who don’t participate in the plan. The margin of error is plus or minus 3.1 per cent for plan participants, 19 times out of 20, and plus or minus 6.9 per cent for non-participants, 19 times out of 20.
The survey also included an online study of 89 senior decision-makers at Canadian organizations that offer their employees a defined contribution pension plan or a group RRSP. The margin of error is plus or minus 8.7 per cent, 18 times out of 20.
Due to rounding, some questions may not add up to exactly 100 per cent.
Advisory board (from left to right):
Christopher Goldie, Franklin Templeton Investments; Janice Holman, Eckler Ltd; Oma Sharma, Mercer; Matthew Williams, Franklin Templeton Investments; Amanda Fickling, Great-West Life; Rod Smith, Great-West Life; Dianne Tamburro, Accompass Inc.; André Choquet, Aon Hewitt; Roman Kosarenko, George Weston Ltd.; Jillian Kennedy, Mercer; Diana Godfrey, Fidelity Investments Canada
SECTION 1: Varying levels of knowledge, engagement spark call for a customized approach to members
In an era of persistently low interest rates, modest investment returns and economic uncertainty, it’s understandable that many people are worried about whether they’ll have enough money to fund their retirement.
So it’s no surprise that the 2016 CAP Member Survey revealed high levels of worry among employees with defined contribution or group registered retirement savings plans. For this year’s survey, Benefits Canada broke down the respondents according to characteristics such as how worried plan members are and how reliant they are on their employers for guidance and advice.
It found 58 per cent of respondents are in the worried category, with more than half of that group also reliant on their employers for guidance. Members in the latter group tend to worry they haven’t saved enough and just want someone else to make decisions for them because they don’t have the time and believe investments are too complex. In their view, the employer has a responsibility to ensure they retire with enough funds and make the right decisions.
Read: Why employers should focus on investment literacy
Only 19 per cent of respondents fell into the category of confident, independent members, meaning they tend to feel ready for retirement, don’t worry they haven’t saved enough and believe they have the knowledge and time to make financial decisions themselves.
And what are the different characteristics of the groups? The worried, employer-reliant members tend to be younger (average age of 39), with an average length in the plan of 7.7 years. They also have a somewhat lower average personal income of $67,000 a year, with the vast majority (87 per cent) saying their employer-provided plan is their primary vehicle for retirement savings. The independent, confident members, on the other hand tend to be older (average age of 48), earn more (average income of $78,000) and have been in the plan for a longer period of time (average of 11.3 years). And in their case, just 31 per cent say their employer provided plan is their primary vehicle for retirement savings.
Interestingly, even though most plan participants are worried about saving enough, 54 per cent of survey respondents said they felt financially prepared for retirement. In fact, responses to many survey questions were similarly contradictory. Although 63 per cent of respondents consider themselves a knowledgeable investor and 88 per cent said they were realistic about their current and future financial position, 48 per cent agreed they don’t have enough time to spend on investing and financial matters and 50 per cent said they find such issues too complicated.
More than half (54 per cent) would like someone else to make investment decisions for them so they don’t have to do it themselves. Reasons given include being afraid of making a bad investment decision (50 per cent), not feeling confident (44 per cent) and believing there are too many options to choose from (32 per cent).
Read: Gaining momentum with auto features
Eight in 10 (79 per cent) plan members just want to make an investment choice for their workplace retirement savings plan and then be able to forget about it and not worry. Not surprisingly, the desire to set and forget is more prevalent among those who wish someone would make investment decisions for them (85 per cent), don’t have time to invest (86 per cent) and find investing complicated (87 per cent), versus those who hold the opposite views. But even among those who are confident, independent plan members, 58 per cent still want to set their investment choice and then forget about it.
“The survey results have been very consistent year over year and, although the industry is focused on improving member engagement, we’re not seeing huge improvements in a lot of areas,” says Rod Smith, director of client services for the central region with Great-West Life’s group retirement services. “Engagement levels remain low. Seventy-nine per cent of members just want to take a set-it-and-forget-it approach. We could do a better job of checking in with plan members over their careers, nudging them and encouraging them to re-evaluate their programs according to changing life circumstances.”
Oma Sharma, a partner and defined contribution consulting leader at Mercer, agrees the conversation with plan members is ripe for change. “I saw a lot of disconnects, and that concerns me,” she says. “I was quite surprised at the percentage of respondents who thought they had a good handle on how much money they need to save, but it is clear there isn’t a strong understanding because of the number of people who said they are worried about running out of money.”
Industry experts offer a range of ideas for how to improve plan members’ knowledge about their plan and help them prepare for retirement. “It would be ideal to personalize nudges sent to plan members,” says Amanda Fickling, director of marketing and communications for group retirement services at Great-West Life.
Read: Communicate by cohort to grab members’ attention
And according to Fickling, it’s particularly important for the industry to take a more customized approach. “Information should be tailored to members’ own personal experiences and delivered in different forms, based on how they want to receive information, such as online, email or text. For example, if the member is eligible for an additional company match, we should ideally be talking to them about the match. There is an opportunity to provide more personal advice to worried, employer-reliant members and even for worried, independent members. There is obviously a need for more advice and interaction served up in different ways.”
SECTION 2: Countering plan members’ unrealistic expectations
This year’s CAP Member Survey asked plan participants and sponsors a range of questions about preparing for retirement. And while there’s strong agreement that employer-sponsored retirement savings plans are an important part of retirement planning, the responses suggest the need to do more to ensure a successful outcome.
On the optimistic — and perhaps unrealistic — side, plan participants expect to retire at an average age of 63.2 years. They also anticipate average savings of $740,097 for retirement — a jump from $566,956 in 2015 — and 68 per cent believe they’re currently on track to meet their target for the amount of money they need to save. Plan participants expect a 17.3 per cent average annual rate of return over the long term until they retire on their investments and they claim to be currently achieving a 16.5 per cent return (not including a company match).
Read: Canadians overly confident about retirement preparation: study
“A disconnect emerges here that gives rise to concern,” says Christopher Goldie, retirement marketing at Franklin Templeton Investments.
“There is a degree of self-confidence that seems to be completely turned on its head in the realm of expected returns. Individual plan members or investors simply don’t understand the nature of capital markets today or are very optimistic. I wish I could share their optimism.”
Rosy expectations of return on investment and accumulated retirement savings don’t necessarily mean plan participants are confident about their retirement, however. Most (73 per cent) said they expect that, if they’re careful, they’ll be financially secure in retirement. Almost one in eight (12 per cent) expect to be able to do whatever they want in retirement, without any serious financial concerns. But in a contradictory finding, 66 per cent of plan participants felt that, despite their best efforts, they’ll run out of funds during their retirement.
Increasing longevity is a major threat to ensuring retirement funds last. Plan participants expect their retirement savings will have to last 23.9 years on average. Adding in their expected age of retirement means plan members would live until 80 years of age on average. But 35 per cent of respondents said they don’t know how long their money needs to last.
“How long does a million dollars last?” says André Choquet, senior consultant for financial risk consulting at Aon Hewitt. “Very few people sit down and think about what they will spend their money on in retirement and how long they will live. People don’t tend to think about health-care costs, either, which could put a big dent in their savings.”
Industry experts question how plan participants estimated how much they need to save and how long it will have to last when only 37 per cent of plan participants said they have a formal, documented financial plan that outlines at what age they’ll retire and the amount of money required to do so at that point. Meanwhile, 68 per cent said they were currently on track to meet their target for the amount of money they need to save. That’s quite a jump in confidence since 2011, when only 51 per cent said so.
Read: Which is better: DB, DC or a third way?
“It’s incumbent on all of us, whether we are asset managers, plan sponsors, record keepers or financial advisors, to temper plan members’ expectations of the market,” says Matthew Williams, senior vice-president and head of defined contribution and retirement at Franklin Templeton. “If people are expecting such high investment returns, they may not be saving enough because they expect their returns to be so strong. It is important for people to understand, because longevity is a critical component to building a savings plan. Sixty-five-year-olds today are living another 22.6 years for men and 24.6 years for women. That’s considerably longer than a generation ago. This trend will have a significant impact on retirement adequacy.”
Plan members’ attitudes to and engagement in their plan also showed inconsistencies. The vast majority expressed satisfaction with their workplace retirement savings plan (89 per cent) and the performance of their investments in it (85 per cent). But many members still aren’t using many of the services and tools related to their plans. Within the past year, only 34 per cent reviewed all retirement investment statements; 29 per cent went to a website to review their account balance or transactions; 23 per cent went to a website to look at retirement plan information; and 20 per cent consulted their personal financial advisor regarding their workplace plan.
It’s easy to conclude that the level of understanding of plan members isn’t where it should be. “It’s not enough to just look at retirement planning,” says Diana Godfrey, vice-president of human resources services at Fidelity Investments Canada. “As plan sponsors, we need to accept that there is more for us to do in providing assistance. Communication and education is important, but it is just not enough.”
Read: Use plan design to help bridge the financial literacy gap
Roman Kosarenko, director of pension investments at George Weston Ltd., agrees. “We certainly have a fundamental problem on our hands,” he says. “We try very hard with communications and advice, but it doesn’t take hold, for some reason. It is probably the plan design that has to evolve, and probably with some help from regulators, because plan sponsors, [by] themselves, don’t have enough tools to do that.”
Plan design is key, according to Jillian Kennedy, senior defined contribution and savings consultant at Mercer. “Today, we’re offering smart defaults and really trying to define what retirement adequacy is about. But we need to challenge ourselves to go to the next level of looking at financial wellness in general. If we put too many tools on the website or we try to nudge or send emails or send multiple statements, employees can be overwhelmed by that. We have to make it more meaningful for them.”
For Great-West Life’s Fickling, it’s important to simplify the language around lifestyle. “Instead of talking about replacement ratio, it would be better to ask members what their retirement looks like to them. Do they want to live a more moderate lifestyle, the same lifestyle or a better lifestyle compared to their current lifestyle? Then you can align replacement ratios with those descriptions.”
Read: Tips for implementing a living standards replacement rate
One of the positive findings in this year’s survey is that most (52 per cent) plan members would support automatic enrolment in their employer-sponsored retirement savings plan, with an option to opt out, and 59 per cent would accept automatic escalation of contributions.
“It is encouraging, overall, that there is an acceptance of auto features in retirement savings programs,” says GreatWest Life’s Smith. “If plan sponsors are wary of how auto-enrolment and auto-escalation would be received, there is some good news in the report that it wouldn’t be as big a challenge for them as they may think.”
SECTION 3: The need for ‘creative solutions’ to decumulation
The transition to retirement can be worrisome for employees, especially when hopes for retirement income don’t match reality. Based on the findings of this year’s CAP Member Survey, there’s yet another troubling gap between what plan members and sponsors expect at retirement.
Many employees with employer-sponsored retirement savings plans don’t have a great understanding of how their plan works or how much they need to save for retirement, yet most seem optimistic about what the plan will provide once they leave work. Nearly two-thirds (62 per cent) of participants said their defined contribution pension plan or group RRSP is their primary vehicle to save for retirement. And 77 per cent are confident their employer-sponsored plan will provide the amount of money they expect in order to meet their financial objectives for retirement.
Members, on average, expect their employer-sponsored plan to provide 30.5 per cent of their total retirement income, with government pensions predicted to contribute 21.3 per cent. Lesser sources of retirement income include personal RRSPs (17.9 per cent), other personal savings (11.4 per cent), investments in real estate (7.2 per cent), a defined benefit pension plan (5.6 per cent) and an inheritance (3.5 per cent).
Read: 2015 CAP member survey: Understanding the decumulation dilemma
“Retirement saving is abstract for a lot of people, and that’s a big issue,” says Franklin Templeton’s Goldie. “The full significance of the move away from DB to DC and the difference that makes isn’t appreciated by the vast majority of plan members in Canada. We do not believe they fully grasp that you can have two people the same age in similar jobs and have vastly different outcomes. They think they are saving for retirement and it will be there for them and yes, maybe it will be. But what’s there can vary dramatically.”
Despite strong hopes for their plan, 64 per cent of the members surveyed admitted they don’t spend as much time on it as they should, with 28 per cent saying they’ve never changed where they invest their funds.
Perhaps it’s no surprise, then, that 50 per cent of members said that, ultimately, their employer has a responsibility to ensure they’ll retire with enough funds to live at an acceptable standard of living. Nearly all (90 per cent) plan sponsors agreed it’s important to their organization that employees have an adequate retirement income, but 96 per cent feel it’s the responsibility of the plan members to take an active role in their plan to ensure they can retire successfully.
Although most sponsors agreed plan members aren’t as engaged or knowledgeable as they should be, 69 per cent said the potential legal risk of providing advice was a bigger concern to their organization than the potential for those who retire with insufficient funds to sue for not ensuring they accumulated enough retirement savings.
As Janice Holman, a principal at Eckler Ltd., points out, employee expectations and reliance on employers hit a peak in the 2016 survey. And once again, she notes, there’s a gap between plan members and sponsors when it comes to those expectations.
“These plan sponsors’ DC plans haven’t come to maturity enough to see the reality of members leaving their organization and what it looks like and how they are going to have to support those members,” she says. “How do we close the gap between the expectations of plan members and what plan sponsors are willing to do for the employee and how that will affect the business going forward? As an industry, we are making the situation worse, rather than better, so something has to change in how we’re designing the plans, communicating the plans and engaging members. Otherwise, we are going to be in a very scary spot.”
Read: Member engagement, decumulation among lessons from Britain
Payout options for savings accumulated in the plan are a major consideration for plan members. Most (67 per cent) respondents aged 45 or older feel professionals should assist them in making decisions on what to do with their retirement savings when they retire, with 33 per cent wanting their employer to offer a financial advisor; 24 per cent looking for assistance from the provider of their plan; and 18 per cent suggesting their employer should help them make the decisions.
The majority (85 per cent) of plan sponsors agreed that their organization should ensure that when employees retire, they get help in choosing how to invest their funds. Plan sponsors believe there’s a gap in the available services, however, with 75 per cent of them suggesting there’s a need for a wider range of decumulation products for members.
“We, as an industry, have spent a lot of time talking about decumulation over the last few years, and I think we’re going to burn a lot more calories on it, particularly as baby boomers shift through retirement,” says Franklin Templeton’s Williams. “Right now, there are three broad choices: lump sum, programmed withdrawals and annuitization. With interest rates being so low, the cost of annuitization is very expensive, and we need to consider more creative solutions for the payout phase of retirement funds.”
Read: Mind the gap: Highlights of Benefits Canada’s retiree/pre-retiree research
Finding a balance between what plan members expect and what plan sponsors can offer will be an ongoing challenge. Dianne Tamburro, vice-president at Accompass Inc., says plan sponsors shouldn’t be afraid of doing more to help members understand how to reach their retirement goals.
“CAP guidelines suggest that plan sponsors should clearly define and document the purpose of their plan, and one of the key words in that document is ‘assist.’ The employer-sponsored retirement savings plan isn’t the only source of retirement savings for members. Plan sponsors should explain to employees that their retirement savings plan is one piece of the puzzle and the members, along with government benefits, need to finish the other 70 to 80 per cent of the puzzle that the plan isn’t going to provide them in retirement. Plan sponsors are generally too shy to tell members: ‘This is what the plan is going to get you. Is that enough for you?’”
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